World EV Competition is Ramping up

Investment Analysis Clubs Macro Economic Trends and Risks
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China EV manufacturers have their supply chain set up [it certainly helped that Chinese government was in full support of the EV industry] and make many of their own parts than outsource them And of course while labor have risen in China they are still well below what legacy makers pay. Which is why they are moving as many US factories to Mexico as they can, But Mexico labor costs are still higher than China’s. Except for the Bolt I believe Ford & GM lost money on every EV produced. Not a good start in dominating the EV market space. That can change. But it won’t happen overnight.

China is way ahead. It controls something like three-quarters of the market for the raw materials that go into these batteries, like lithium, cobalt and nickel.

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According to Sandy Munro, because they are “Penny Wise and Pound Foolish.”

Most industries adopted the “horizontal value chain” approach advocated by the division of labor to replace vertical integration.• While the new approach has many benefits it has its downsides. One of the downsides is the loss of holist design and development. Buyers look to save money by getting the cheapest parts while ignoring the total cost of complex components. This is why vertical (holistic) integration leads to lower overall costs.

Tesla calls it “first principles.”

The Captain

•
• The idea behind horizontal value chains is that businesses should specialize in what is “core” for them and farm out out everything else (context). It makes perfect sense to hire janitorial services instead of doing it in-house but the closer you get to the core the less sense it makes. In the normal flow of things there are few incentives to “go back to” vertical integration, specially when most of your suppliers are overseas. It takes a disruptor to break with an established way of doing things, to break with tradition, with how things have always been done.

The above is the cartoon version. If you want to know more google core vs. context and Geoffrey Moore, author of Crossing the Chasm and very influential Silicon Valley consultant.

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My guess would be it’s because they’re only a couple of years into it, and everybody fumbles around for the first few years, including Tesla. Henry Ford took the cost of producing a Model T from $900 to $350, but it took him 8 years to do it.

The reason Tesla is now able to cut costs so dramatically is that they have established their supply chains, figured out their production kinks, and pretty much know what they’re doing. That is probably not yet true for GM or Ford (and may never be, a lot of car manufacturers never caught up to Henry.)

It’s also that companies tend to amortize R&D over a finite - and short - period, not over the lifetime of a product since they don’t know what the lifetime will be. So there are tremendous starting costs making the first production expensive. As they learn what works and what doesn’t, what sells and what doesn’t, what’s important and what’s not, their costs will come down.

But only if they stick with it; the Tesla strategy of raking in profits and then suddenly slashing customer prices is causing pain for other manufacturers, who have to not only figure out the technology but also divine what consumer niches they are going to be able to serve efficiently. Not all of them will, obviously.

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Those aren’t the only reasons, and probably not even the main reason. I think the main reason is because Tesla designs, from the ground up, for manufacturability. The most visible example is the dashboard. A Tesla dashboard has very few parts and is easy to assemble (snap the plastic parts together and attach the steering wheel and attach the display to its wiring harness). A GM/Ford/VW/etc dashboard has hundreds of parts and require several subassemblies, and require lots of assembly (attach 50+ parts and 3-4 large subassemblies, and align 36 button assemblies, attach the displays, etc). There’s also a lot more that can go wrong with 50+ parts than 5 parts. And by “go wrong”, I don’t only mean in the customer’s hands, but also on the factory floor, that means more vehicles go back to “rework” to rejigger or realign something that moved in the process of assembly. Rework is probably one of the MOST expensive things on an assembly line, the more you can avoid it, the lower your overall cost.

And that is an essential part of GM/Ford/VW/etc issues with EV production. They started by trying to modify ICE cars into EV cars, and that worked to some extent, but ended up being too costly, and they did/will get rid of those designs quickly. Then they also tried to modify ICE assembly lines to build EVs, and that ends up bringing along much of the baggage of ICE assembly lines (12 stations of dashboard assembly instead of 2, for example, maintaining inventory of 3-4 subassemblies for another example, etc). And the legacy automakers know this, and are working quickly to change so they can reasonably compete in the coming decades. The legacy automakers that are willing to jettison much of their “history”, their old traditional assembly plants, their old management structure (don’t get me started on this, I have decades of crazy stories about how simple, clever, useful, and cost saving engineering changes were rarely done solely due to management structure), over-reliance on subassemblies, etc.

I could also discuss the generic issues of subassemblies and how they radically affect the way OTA software updates work, or don’t work as the case may be for most legacy automakers.

THESE are the major issues facing legacy automakers. And they all know it. And most of them are working to fix it. And Tesla isn’t perfect, it is quite possible that some other automaker will find better ways to do things and end up becoming a real competitor in the EV space. BYD might be one, but due to the lack of transparency, and lack of a mostly free market in China, there’s no way to know for sure. Plus, of course, existing in a non-free nation could relegate it to usual corruption that often destroys nearly successful enterprises.

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I don’t disagree at all…except:

Car makers long ago learned to do this. Among other things, it was one of the hallmarks of Ford’s Model T production, and you can read about it in many auto books from Iacocca to Lutz. That is not to say they’ve always done a good job of it, they haven’t. And there are trends in the industry which upend it time and again. (You might recall the rush to front wheel drive after the Olds Tornado, or the rush to compact cars after the Japanese invasion (there were some mighty bad ones remember?), or … now, EVs.)

The old metal guys were caught flat footed, to be sure, and in the gold rush to “get into the game” they took shortcuts just to have a placeholder entry. That doesn’t mean they won’t bring a lot of that institutional expertise to the game, given a few years to sort out what works and what doesn’t. (And that doesn’t mean they will all be successful at it, either. I’m a realist here. Studebaker, Packard, American Motors all made decent cars, right up until they didn’t.)

But I would attribute much of the “industry confusion” for the need to get something in production quickly. No CEO, under sudden pressure from shareholders, is going to wander into the engineering department and say “No boys, take your time. It’s OK if we don’t have anything to show for five years.”

[I admit to being prejudiced in this way because I have watched American industry do it so often. Scripps, after launching HGTV realized the gold rush for “channel position” was on and launched the DIY network - not with good programming but with * something* (reworked HGTV clips) until they could get good programming. How many Mustang wannabe’s followed the Mustang in short order? Or plasma TVs when “flat” became the rage?]

“Manufacturability” is pretty high on the list for engineers, except when it’s a gold rush, and then it’s “shortcuts”, and “make it snappy!”

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How do you define “quickly”? VW, Nissan, Renault, Mitsubishi, Kia, BMW, Audi were all selling BEVs in Europe in 2015. The GM was selling the Chevy Volt in 2011.

It wouldn’t surprise me if the engineers at the OEMs know exactly what it would take to build a competitive BEV. The problem is that the OEMs have invested so much in ICE infrastructure and make so much profit from gas cars that there is too much entrenched resistance to make those changes.

In reality, the car OEMs have not been particularly good at adapting to change. The Japanese invasion was not just about smaller cars but also a different type of management and manufacturing culture. As a consequence, AMC went belly up, Chrysler became European, and after a decade or so of frustration Ford and GM gave up and decided to focus on trucks and SUVs.

Now Tesla and the Chinese are presenting a new external challenge and the western OEMs are responding much like the American legacy companies in the 1980s, bluster and retreat. I suspect the end result will be much the same.

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It doesn’t matter how much money they have…they can’t suddenly rush into selling more EVs in 1.5 years if they don’t have the factory capacity and the supply chains setup (especially battery production).
And they aren’t ramping these things up…they have been announcing that they are scaling back.

Mike

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And they still are. There were about 1.81 million BEV’s sold in Europe this year (through November), and only about 330K of them were Tesla’s. The remaining 1.48 million were sold by incumbents. That was an increase of about 33% over last year’s 1.12 million (YTD through November).

For the consumer-facing stuff (like dashboard design), I think it’s something a little different. Tesla was (and mostly is) a fairly new brand, so it started with a clean slate in consumer expectations. So value-engineering the heck out of the cabin interior to create a minimalist (and therefore much cheaper) consumer experience doesn’t conflict with consumer expectations. No dashboard dials, no problem. Design the car to what’s easiest to manufacture, not what all of our other cars look like. Existing automakers with a dozen or more models will have a harder time bringing a no-dashboard-dial BEV to market, because none of their existing products look that way.

The interesting question is what happens on those consumer-facing things going forward - not based on consumer expectations of a brand, but consumer preferences. If consumers have a real preference for something, producers will face pressure to meet their preferences, even if it makes manufacturing a bit more complicated. Ford might have been able to start off with, “any color as long as it’s black” back in the day - but once consumers started to have color choices from other manufacturers, he had to relent (even though it’s much simpler to make cars in only one color). But if consumers don’t care, then the incentives push the other way - the cheaper manufacturer has the advantage, and the others will have to migrate towards that process.

I wonder which way that will go for some of the design elements. Will all cars see their displays and controls migrate away from the dashboard and steering column into the touchscreen. Or will the reverse happen and Tesla ends up having to put some of that stuff back in their cars to accommodate consumers?

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That’s true, of course, but I think it was pretty half hearted. More a “toe in the water” to think about it and keep some designers occupied than “this is a real market segment!” Then, in 2018 Tesla introduced the 3. Look what happened:

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https://afdc.energy.gov/data/10567

So in 2019 the old boys said “Holy crap, maybe we should get serious!” It takes about 4 years to bring a car from the drawing tables to production - and that’s for iterative change, not wholesale “scrap the old system and find all new supply chain” production.

I also agree that the old boys haven’t been great at adaptation, although clearly it has happened. There were lots of small cars, lots of muscle cars, lots of mommy vans, lots of front wheel drives, multitudes of SUVs, lots of mass production, lots of automatic transmissions, lots of resourcing and rebadging and so on after one pioneer proved the concept. Tesla has done that, obviously, and the size of the gold bars (pun intended) on the chart surely got the attention of the big boys,.

Please note: I’m not predicting everyone will succeed. As you point out, Chrysler is barely breathing, GM and Ford have retreated to a few segments, and so on. But the Korean companies (Hyundai and Kia) seem keen, surely there will be a couple of European manufacturers who make the curve, and of course there are the Chinese.

Does Tesla have the lead? Surely. Do leads always mean endless success? Hardly. Funny thing about technology, the first guy gets way ahead but the gap narrows, pretty much on an asymptotic chart over time, unless there is a substantial network effort that keeps competitors out (AOL, Microsoft’s OS + middleware, YouTube, and so on.) I think Tesla might have had that with “charging” but that’s over, it’s hard to think what keeps Kia or VW or whoever from producing a well priced, well performing vehicle a few years from now. Then it’s about style, price, and all the usual metrics of auto sales.

Anyway, I define “quickly” as from 2019, when Tesla blew the doors off in 2018. Four years, maybe five or six for the new technology, maybe more given supply chain for batteries, and it’s a horse race. Tesla still in pole position, but the pole horse doesn’t always win. Sometimes the jockey makes a bunch of stupid blunders and the horse loses altogether :wink:

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Sure, but another funny thing about technology is that the winners are typically companies that innovate at a faster pace than competitors and who can move fastest to bring new technologies to market. These are currently the huge advantages Tesla has over the western OEMs.

It is Tesla pioneering gigacasting, structural batteries, 48V architecture, ethernet replacing hard wiring, over-the-air updates, steering by wire, unboxed manufacturing, etc. As long they keep innovating faster than the competition no one is going to catch up.

Tesla has the corporate culture of a silicon valley tech company, one that emphasizes innovation, rewards risk taking, and minimizes management hierarchies. In contrast, the western OEMs have the culture of a mature industry that likes the status quo and is resistant to change. One can’t stay in the race like that in a rapidly evolving market, let alone catch up to Tesla.

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And the friction added by the UAW.

:face_with_monocle:
ralph

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And a dealer network that doesn’t really want to sell EVs.
Should I list some of the reasons?

Mike

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You left off a lack of demand in many places…

DB2

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Ford does. It is regearing to use the Tesla charging plugs. GM I know less about. GM also has been switching to the Tesla plug.

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I’m not sure what that has to do with my post or the one I replied to.
But, certainly if the dealer-based car models grew sales as much as Tesla then there wouldn’t have been a “lack of demand” in 2023 compared to 2022.

Most likely demand for them would have been higher if interest rates were the same as in 2022 and they didn’t tank sales by finally admitting they backed the wrong charging port.

Mike

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You listed some reasons a dealer network doesn’t really want to sell EVs. I suggested that if demand were high and they were flying off the lot then dealers would be glad to oblige.

DB2

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Funny contradiction, dealers complain that EVs require little service and Tesla haters complain that EV service is too expensive.

The Captain

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OK, I feel I should respond to some of the misinformation that’s going around lately.

First, there were more EVs sold in 2023 than in 2022. And more in 2022 than 2021. Even without Tesla’s numbers, EV sales are up, and dramatically. The final number for 2023 is likely to be north of 14 million, a 34% increase from 2022. There is no “lack of demand”, what there is/was is a mismatch of demand between optimistic (I would say “gold rush” if it didn’t offend someone) projections and reality. Lots of stupid car execs thought they were going to get the same increase out of the box that Tesla showed in 2019, even though Tesla had been working at it for a decade.

All the headlines you are reading about “scaling back” are bass-akward. Those companies are actually scaling UP from history, but “back” from the over-rosy estimates they were greedily eyeing when they looked at Tesla’s staggering growth.

I’m sure there are some instances of dealers not wanting to sell EVs. In fact here’s one for you: Iacocca faced resistance from Chrysler dealers when he introduced the cargo/passenger van; the dealers thought of themselves as catering to a “higher” market segment of wealthy executives and such. The resistance disintegrated quickly when Iacocca pushed, and people flocked to get it. Meanwhile GM and Ford, both of which had considered such a vehicle, were caught flat footed and Chrysler had a 5 year march on the segment. (Worth noting that it also required different manufacturing techniques, complete redesign of frame, assembly line, etc.)

Having just completed the rounds of car buying, I will say that the three dealers I visited [four, actually, including Chrysler for the Pacifica] were only too happy to show me EVs, hybrids, anything I wanted. They were: Lexus, Hyundai, and Kia. Mrs. Goofy bought a hybrid, not the PHEV Kia one she wanted, because there was scant inventory anywhere in 4 states with a non-black interior. Scant inventory? None, actually within Kia. She bought a Hyundai traditional hybrid. I have also been to the local Chrysler dealer twice to look at the Pacifica PHEV van, and they were more than accommodating. Is this typical? Or does it seem likely that dealers couldn’t care less if I want to buy one of those? (Yes, I have read of the GM dealer repurchases [Buick, I think] so I’m not saying it doesn’t exist. But let’s get past the “bad dealers” meme, OK?)

Honest of salespeople? OK, got me there. That doesn’t change. The fact that they’re selling more EVs than ever tells me that it isn’t the worst thing around. I’d like it to be more frictionless, but apparently that’s not gonna kill the business.

FYI: Re: Dealers:

I have long argued that a significant segment of buyers will not buy an EV because they are in apartments, don’t have a garage, or the choice is inappropriate for them for charging and distance reasons. I haven’t changed that opinion, even with expanding charging networks on the horizon. That doesn’t seem to be stopping the sales figures from climbing year over year.

Finally, lest there be any misunderstanding, I will say I expect Tesla to be a great and powerful car company 5, 10 years hence. Heck, it already is by any reasonable standard. And I expect some of the incumbents will fail - I would not be surprised to see it be American manufacturers, saddled with hidebound executives, union contracts for a different era, and supply chains better designed for the 80’s. Maybe not, some have made the curve before. Who I would really watch for competition in this space are the Koreans, first and foremost. They are turning out excellent cars (the Ionic6 is Motor Trend’s EV of the year, yes possibly because Tesla didn’t have anything new, but still).

The Japanese are inching up. Their upscale brands are behind the curve, certainly (my long favorite brand, Infiniti, doesn’t have a single hybrid, PHEV, or EV in the lineup.) Lexus has but one, but the lower brands have multiple options: Nissan, Toyota, Mitsubishi, Mazda, Subaru.
And it goes without saying that China is and will continue to be a force, geopolitical impacts aside, and the European manufacturers are a-comin’ and selling, too.

At any rate, it seems we’re dealing with a lot of “fake news” hereabouts. There is demand, plenty of it. Dealers will sell, just ask. EV growth is outpacing even Tesla, quantitatively, worldwide. There’s lots to celebrate; leads change, it’s still a race. Sit back and enjoy.

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Whether this is true or not, the legacy car makers have an additional headwind of the dealers based on the list I gave.

Goofy, I mostly agree with your points about lack of demand vs cutting back from rosy predictions.

But as long as you’re giving your anecdote I’ll repeat my recent experience, giving only the worse parts.
Last April my 10 year old Prius plug-in catalytic converter was stolen. I went to the dealer and they showed me a list of 60+ people ahead of me on the to-be-repaired list and said it would be about a 6 month wait. So I said the best option probably was to trade it in… and they hand walked me over to sales. When I wanted to look at the only Toyota BEV they said I’d have to come back when the EV guy was there. This is one of the biggest Toyota dealers in the Bay area. They were the first location around that got the 2001 Prius…I got car #6 from them and 3 others since.
Eventually I got to drive the Bz4x a day or two later.
Meanwhile I went to the large GM dealer a few blocks away. A few Bolts on the lot but couldn’t answer when I could get one (EV model not EUV) and said I could order it. Can I drive one? No, please make an appointment with the EV guy. OK, how about tomorrow? Here is his card, please call him.
I went home and researched all the models, trims, colors and came back the next day and drove the model I didn’t want since that what they said I could drive and they said to call everyday to see what cars came in.
Dissatisfied I went online (to Edmunds, I think) and entered what car model, trim, colors I was looking for and within 30 minutes had gotten 5 or 6 texts from various dealers in the area. Most seemed like bots giving me a number to call or some generic note like we get new cars every week keep checking back. One seemed like a human reply saying they had the model, trim and 1st color choice. I replied back to send me the VIN and price and they did…only problem was they were ~75 miles away. After a call I said I would be there at 3pm the next day, please have it ready to go.
The next day they texted me at 2:30 asking where I was. I said I’d be there in ~15 min. When I arrived they said the car would be ready at 5pm! They actually said, essentially, someone more important was having their car prepped. They wouldn’t let us even see the car or check the window sticker. Almost ready to walk out. I won’t go into all the messiness of what happened for the next 2 hours but they delivered the car 5 minutes early – at 4:55 after they claimed to have the crew speed it up.
There is more to this dealer disaster but I’ll end it here.

Mike

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This is not quite correct, as demand is obviously price dependent. With the exception of Tesla, there IS a lack of demand for EVs that are priced at a level that allows profits. That’s the central problem facing OEMs. This is exacerbated by the fact that, for the most part, the OEMs are selling gas and electric versions of the same models, with the latter at a substantially higher price.This makes it tough to sell the electric version

For example, the gas F150 starts at $35K. The electric version at $50K. The Mustang ICE starts at $31K, while the EV version is at $41K. You have to be a pretty good salesman to sell the electric version when the much cheaper gas version is sitting in the lot. That’s a huge disadvantage for the OEMs when it comes to EV sales.

Therein lies the genius of the cybertruck. Tesla at this point in time cannot make an electric mirror-image of the F150 that would be profitable at $35K. Instead, it created something very different in order to justify a higher price point.

The OEMs currently lose money on every EV they sell. A lot of money. The dealers know that they are losing a lot of future service profits whenever they sell an EV over an ICE. It is actually pretty remarkable that EVs are growing as fast as they are when the motivation to sell them by most of the major players is so weak.

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